Canmax Technologies Co., Ltd.'s (SZSE:300390) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Canmax Technologies (SZSE:300390) has had a rough three months with its share price down 8.8%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Canmax Technologies' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Canmax Technologies is:

6.0% = CN¥886m ÷ CN¥15b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

See our latest analysis for Canmax Technologies

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Canmax Technologies' Earnings Growth And 6.0% ROE

At first glance, Canmax Technologies' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.2%. Particularly, the exceptional 35% net income growth seen by Canmax Technologies over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Canmax Technologies' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.1%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Canmax Technologies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Canmax Technologies Efficiently Re-investing Its Profits?

The three-year median payout ratio for Canmax Technologies is 28%, which is moderately low. The company is retaining the remaining 72%. By the looks of it, the dividend is well covered and Canmax Technologies is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Canmax Technologies is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

On the whole, we do feel that Canmax Technologies has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Canmax Technologies by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.